Theme 1 Definitions Flashcards
Ad Valorem Tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
Asymmetric Information
Where one party has more information than the other, leading to market failure
Capital Goods
Goods produced in order to aid production of consumer goods in the future
Ceteris Paribus
All other things remaining the same
Command Economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
Complementary Goods
Negative XED; if good B becomes more expensive, demand for good A falls
Consumer Surplus
The difference between the price the consumer is willing to pay and the price they actually pay
Cross Elasticity of Demand (XED)
The responsiveness of demand for one good (A) to a change in price of another good (B)
%change in QD of A divided by
%change in P of B
Diminishing Marginal Utility
The extra benefit gained from consumption of a good generally declines as extra units are consumed
Division of Labour
When labour becomes specialised during the production process so do a specific task in cooperation with other workers
Economic Problem
The problem of scarcity; wants are unlimited but resources are finite so choices have to be made
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised
Equilibrium
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded
Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
External Cost/Benefit
The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit
Free Market Economy
An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce and for whom
Free Rider Principle
People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit
Government Failure
When government intervention leads to a net welfare loss in society
Habitual Behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
Incidence of Tax
The tax burden on the taxpayer
Income Elasticity of Demand (YED)
The responsiveness of demand to a change in income
%change in QD divided by
%change in Y
Indirect Tax
Taxes on expenditure which increase production costs and lead to a fall in supply
Inferior Goods
YED<0; goods which see a fall in demand as income increases
Information Gap
When an economic agent lacks the information needed to make a rational, informed decision
Information Provision
When the government intervenes to provide information to correct market failure
Luxury Goods
YED>1; an increase in incomes causes an even bigger increase in demand
Market Failure
When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources
Market Forces
Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand
Maximum Price
A ceiling price which a firm cannot charge above
Minimum Price
A floor price which a firm cannot charge below
Mixed Economy
Both the free market mechanism and the government allocate resources
Negative Externalities of Production
Where the social costs of producing a good are greater than the private costs of producing the good
Non-Excludable
A characteristic of public goods; someone cannot be prevented from using the good
Non-Renewable Resources
Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed
Non-Rivalry
A characteristic of public goods; one person’s use of the good does not prevent someone else from using it
Normal Goods
YED>0; demand increases as income increases
Normative Statement
Subjective statements based on value judgements and opinions; cannot be proven or disproven
Opportunity Cost
The value of the next best alternative forgone
Perfectly Price Elastic Good
PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes
Perfectly Price Inelastic Good
PED/PES=0; quantity demanded/supplied does not change when price changes
Positive Externalities of Consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good
Positive Statement
Objective statements which can be tested with factual evidence to be proven or disproven
Possibility Production Frontier (PPF)
Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and
efficiently employed
Price Elasticity of Demand (PED)
The responsiveness of demand to a change in price
%change in QD divided by
%change in P
Price Elasticity of Supply (PES)
The responsive of supply to a change in price
%change in QD divided by
%change in P
Price Mechanism
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves
Private Cost/Benefit
The cost/benefit to the individual participating in the economic activity
Private Goods
Goods that are rivalry and excludable
Producer Surplus
The difference between the price the producer is willing to charge and the price they actually charge
Public Goods
Goods that are non-excludable and non-rivalry
Rationality
Decision-making that leads to economic agents maximising their utility
Regulation
Laws to address market failure and promote competition between firms
Relatively Price Elastic Good
When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied
Relatively Price Inelastic Good
When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied
Renewable Resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time
Scarcity
The shortage of resources in relation to the quantity of human wants
Social Cost/Benefit
The cost/benefit to society as a whole due to the economic activity
Social Optimum Position
Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare
Specialisation
The production of a limited range of goods by a
company/country/individual so they aren’t self-sufficient and have to trade with others
Specific Tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought
State Provision of Goods
Through taxation, the government provides public goods or merit goods which are underprovided in the free market
Subsidy
Government payments to a producer to lower their costs of production and encourage them to produce more
Substitutes
Positive XED; if good B becomes more expensive, demand for good A rises
Symmetric Information
Where buyers and sellers both have access to the same information
Trade Pollution Permits
Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control
the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute
Unitary Price Elastic Good
When PED/PES=1; a change in price leads to a change in output by the same proportion
Utility
The satisfaction derived from consuming a good
Weakness at Computation
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs
Adverse Selection
A situation where a person is more likely to take out insurance
Allocative Efficiency
Achieved when society is producing an appropriate bundle of goods relative to consumer preferences
Bounded Rationality
A situation in which people’s ability to take rational decisions is limited by a lack of information or an inability to interpret the information that is available
Cartel
An agreement between firms in a market on price and output with the intention of maximising their joint profits
Competitive Market
A market in which individual firms cannot influence the price of the good or service they are selling, because of competition from other firms
Complements
Two goods are said to be complements if an increase in the price of one good causes the demand for the other good to fall
Diminishing Marginal Utility
The situation where an individual gains less additional utility from consuming a product, the more of it is consumed
Herding
Where people take decisions based on the actions of others, rather than on a rational evaluation of the situation they face
Internalising an Externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system
Law of Demand
A law that states that there is an inverse relationship between Qd and the P of a good or service, ceteris paribus
Marginal Cost
The cost of producing an additional unit of output
Marginal Social Benefit (MSB)
The additional benefit that society gains from consuming an extra unit of a good
Marginal Social Cost
The cost to society of producing an extra unit of a good
Moral Hazard
A situation in which a person who has taken out insurance is prone to taking more risk
Nudge Theory
Analysis that suggests that people’s behaviour can be influenced by making desirable decisions easy to make
Polluter Pays Principle
An argument that a firm causing pollution should be charged the full external cost that they inflict on society
Price Signal
Where the price of a good carries information to producers or consumers that guides the market towards equilibrium and assists in resource allocation
Prohibition
An attempt to prevent the consumption of a good by declaring it illegal
Value Judgement
A statement based on your opinion or beliefs, rather than on facts
